Early in season 1 of Friends, Rachel Green brandishes her first-ever paycheck to the gang, rips open the envelope, and then puzzles, “Who’s FICA? Why’s he getting all my money?” If only she knew the half of it.
For every dollar deducted from her check by the Federal Insurance Contributions Act (which collects the “payroll taxes” for Social Security and Medicare), her boss at the coffee shop had to pay one to the government as well. And employing her carried countless other costs, which, depending on Central Perk’s policies, might include vacation days and paid leave, health and disability insurance, and legally mandated contributions to unemployment programs and worker’s compensation funds. By 2017, wages accounted for just two-thirds of the direct cost of employing an American worker.
Government rules both increase the costs and reduce the value of an employee. Employers try to hold schedules below forty hours per week to avoid paying time-and-a-half or below thirty to avoid the mandates of the Affordable Care Act. The Occupational Safety and Health Administration (OSHA) ensures compliance with lifesaving procedures but also requires that stairrail systems serving as handrails be “not more than 37 inches nor less than 36 inches from the upper surface of the stairrail system to the surface of the tread, in line with the face of the riser at the forward edge of the tread.” The Americans with Disabilities Act facilitates broader inclusion in the workforce but also expensive lawsuits over accommodation for a bridge maintainer’s fear of heights and a teacher’s fear of children.
Nearly everyone supports the broad objectives underlying these policies, and that is the ground on which they are often debated: Isn’t a forty-hour workweek a good thing? Aren’t you for workplace safety? Do you support discrimination? Lost in this kind of framing are the unavoidable trade-offs. After all, we could eliminate workplace injuries entirely if every worker were accompanied at all times by a licensed personal-safety supervisor. But no one considers that a reasonable approach.
Federal regulators increasingly dictate the terms and conditions of the workplace, but they are badly handicapped in carrying this out...
More protections mean higher costs for employers, and that usually means lower wages and fewer jobs for workers. Each new requirement inserts another small wedge between how much the employer must spend to have the work done and how much the employee can earn. Each makes relatively more attractive the alternatives of automating the work, doing it overseas, or abandoning it entirely. From 2005 to 2015, the United States added almost 9 million of the independent-contractor, on-call, and temporary jobs that enable employers to avoid various regulatory burdens, while traditional employment did not grow at all. Yet there remain times when employment regulation makes good sense. If an employer stops providing eye protection to machinists for the sake of raising wages by a few cents, that is no more sensible than the licensed-personal-safety-supervisor plan.
A balance must be struck; the critical question is, who decides? Federal regulators increasingly dictate the terms and conditions of the workplace, but they are badly handicapped in carrying this out in two respects. First, they do not know the preferences of those for whom they are dictating. How can they divine whether a janitor prefers a mandated break every few hours or an extra $50 at the end of the week? Second, they cannot offer the tailoring and flexibility that a diverse national economy requires. Even if they knew the answer for a particular janitor, could they find an answer right for all janitors, let alone all low-wage service workers?
The alternative would be to let employers and employees reach their own arrangements. The employer knows the cost in lost productivity of breaks at a given interval; the employee knows how much he values those breaks. Presumably, the result of their bargaining will not be individualized schedules for everyone. But each employer has a strong incentive to offer the package of pay and benefits to its workforce that delivers the greatest value at the lowest cost, and job seekers have a similarly strong incentive to find the packages that best meet their needs.
The system will not be perfectly efficient, but the question is whether it will be more efficient than a series of edicts delivered from Washington. Skeptics may doubt that workers will have a good sense of the parameters of an employer’s operation, especially for something as intangible as, say, safety conditions. But in fact, workers tend to seek higher wages to compensate for more dangerous jobs—so consistently, in fact, that economists actually use the relationship between higher wages and higher workplace fatalities to estimate how much an average American values his own life (about $10 million). Every time someone justifies a new regulation by quoting the high value of reducing deaths—whether from traffic accidents, air pollutants, or hospital infections—she is endorsing the idea that workers manage to get themselves compensated fairly for the risks they incur.
The stronger objection to leaving employers and employees to their own devices is that the two sides have uneven bargaining power. A given worker with a particular skill set in a specific location may not have many job options from which to choose and, once on the job, may not have a credible option just to quit. But before asking the federal government to impose labor arrangements with no chance of striking the right balance between the parties, we should ask whether we might position the two sides to negotiate effectively themselves.
This should be a central premise of organized labor. When workers decide to act for their mutual benefit and bargain collectively with an employer, concerns about uneven power disappear. When workers bargain collectively, they can bring leverage, resources, information, and sophistication on par with what an employer might have on the table’s other side. Under those circumstances, both sides can be expected to defend their interests and accept tradeoffs in ways that improve their results.
Positioning the two sides (employers and employees) to negotiate effectively themselves should be a central premise of organized labor.
Under current law, however, they are prevented from doing so. Federal programs and regulations now provide almost everything that unions were once expected to deliver to their members: benefits for the elderly, disabled, and unemployed; a forty-hour workweek, paid overtime, and a minimum wage; prohibitions on discrimination; workplace safety standards; personal leave; and even high quality health insurance. What, then, is there to bargain over?
With most of the typical terms and conditions of employment placed off-limits, interactions between unions and management take on the character of hostage negotiations. Unions must find new concessions to extract, even though the ones most valuable to their members have already been secured, and in return they offer management only the labor peace that already existed before negotiations began. No wonder management resists unionization so fiercely, and no wonder collective bargaining agreements have proved so damaging to the firms and industries, like Detroit’s automakers, where they hold most sway.
With most of the typical terms and conditions of employment placed off-limits, interactions between unions and management take on the character of hostage negotiations
The solution is to shift employment regulation from a floor to a default. In workplaces where workers have no collective representation and thus a limited ability to bargain, government rules are a necessity—though, of course, we should strive to improve their quality and reduce their cost wherever possible. But in workplaces where employees bargain collectively with management, the sides should be free to depart from this default when they find it mutually beneficial to do so. Employers could not force employees to relinquish a legal protection, but they could offer something the employees might value more—perhaps less than time-and-a-half for overtime scheduled more than a month in advance in return for limits on unpredictable scheduling; or a waiver from a variety of arcane facility-design requirements in return for employee representation in the facility-design process and the right of approval on new equipment purchases.
Under these conditions, not only would collectively bargained agreements benefit both management and labor in ways that boost firm productivity and worker earnings, but also management could be expected to want the opportunity for such bargaining and to support employees in becoming organized. Other reforms to the nation’s sclerotic, Great Depression–era labor laws would be necessary as well before such a system of organized labor could be expected to function effectively, but the principle of substituting the judgment of the parties for that of the regulators would be the perfect place to start.
Other reforms are necessary, but the principle of substituting the judgment of the parties for that of the regulators would be the perfect place to start.
Who bears the costs and constraints?
A decision to leave the terms and conditions of employment in the hands of workers and their employers departs dramatically from the current trend in policymaking, which seeks to identify and impose the package of benefits that policymakers themselves prefer. Such efforts to override the labor market’s unencumbered and privately negotiated outcomes demand two types of scrutiny, which the contrast with market-based bargaining throws into sharp relief. First, who pays? Second, who is constrained?
When government chooses to provide a benefit itself, the financial transaction is transparent. Funds come from taxpayers and go to beneficiaries. The cost appears clearly in the annual budget. When government instead mandates that someone else, like an employer, provide a benefit, the dynamic is murkier. No “spending increase” occurs. Yet, just as surely, the force of law is used to take resources from some people for the benefit of others.
The minimum wage provides a classic illustration of the phenomenon. A minimum wage may be free to taxpayers, but someone must put the additional money in each paycheck. Maybe it is the employer; maybe it is other employees; maybe it is customers. A theory of who is paying goes a long way toward explaining whether the policy is fair and whether its influence on the labor market will be beneficial.
Generally speaking, government-mandated benefits must be borne in some combination by employers and workers. This makes them doubly unattractive. First, the policy is regressive, imposing a higher burden on people relatively less able to pay, at least as compared with the high-income taxpayers whom society has chosen to fund its social programs. Second, by raising the cost of the employment relationship, the policy pushes labor markets away from the desired outcome of more jobs at higher wages.
If a policymaker does believe a benefit is so important that all workers must receive it, regardless of the agreements they reach with their employers, he should propose to provide it via a standard government program, funded by taxpayers. Benefits provided in this way operate as subsidies for employment and thus boost rather than hinder employment relationships. The policymaker would predictably complain that no funds are available for such a program, but that is the point. If he would not countenance a tax increase to fund his idea, he should not countenance a law that has no “tax” but orders private actors to incur comparable costs just the same.
When policymakers don’t countenance tax increases to fund an idea, they should not countenance a law that has no “tax” but orders private actors to incur comparable costs just the same.
Recognizing mandates as a form of taxing and spending, then, highlights the second question about constraints: If government is to raise and spend funds on behalf of workers, why not just give them the funds via a wage subsidy? Why force them to spend it on the policymaker’s chosen benefit?
The bipartisan push for paid parental leave is a perfect example. The concept of parental leave enjoys broad support, and making that leave paid so that lower-income households can stay afloat while away from work would seem like an obvious prerequisite to making the opportunity universally available. But the policy can be disaggregated into two independent components: the financial payment and the absence from work. For instance, a man with a $30,000 salary who takes six weeks of paid leave receives a $3,600 payment and six weeks off.
What if, especially facing the costs of a newborn on a shoestring budget, that family decides the man should work during those six weeks, allowing him to receive his $3,600 paid-leave payment as well as $3,600 of salary for the period? If the goal is to provide financial resources to the family, this outcome should be as welcome as the one in which he takes his leave.
By instead conditioning the $3,600 paid-leave payment on not working, the government asserts an explicit goal of having the man spend time at home. That presents an awkward quandary. If the government has already decided it has the $3,600 available to spend on helping this family, and the family has decided the man’s best use of time in those six weeks is working for pay, does the policymaker have a legitimate basis for overruling the family’s determination?
More often than not, government-mandated benefits are borne by the wrong payers, deliver the wrong benefits, and push toward the wrong labor-market outcomes. Empowering workers to assert their own interests and find arrangements mutually beneficial to themselves and their employers holds far greater promise for delivering the outcomes we need.
Oren Cass is a senior fellow at the Manhattan Institute. This essay is adapted from Mr. Cass’s new book, “The Once and Future Worker: A Vision for the Renewal of Work in America,” which will be published by Encounter Books on Nov. 13.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.
By Oren Cass
“Oren Cass has accomplished the rare feat of not only saying something truly new and innovative about our society, but also doing it in a readable, engrossing way. The Once and Future Worker is a wake-up call to our political class...” — J.D. Vance, author of Hillbilly Elegy
© Photo by Scott Olson / Getty Images